BAE Faces Global Challenge

BAE Systems faces a major leadership challenge over international contracts. How serious is the threat, and how might BAE Systems differ from other globally trading organizations?

A long-running story broke this week [Oct 1st 2009]. British anti-fraud prosecutors intend to pursue a case against BAE Systems, the world’s No. 2 defense contractor, on charges of corruption in dealings on foreign contracts worth hundreds of millions of pounds.

Prosecutors said they will seek permission from Attorney General Patricia Scotland to pursue the case against BAE, which is Britain’s largest manufacturer. In a statement, BAE Systems said it “continues to expend considerable effort seeking to resolve, at the earliest opportunity, the historical matters under investigation by the SFO.”

The cases involve alleged secret payments on sales of a military radar to Tanzania; alleged bribes behind a Czech deal to lease Anglo-Swedish Gripen warplanes; payments allegedly made on a sale of two frigates to Romania; and 100 million pounds ($160 million) in allegedly secret payments in a weapons deal with South Africa.

Christopher Grierson, a partner in the bribery and corruption taskforce at Lovells LLP international law firm, said the SFO’s decision would shake British business.

“The sheer scale of the penalties being sought, which are believed to be 1 billion pounds ($1.6 billion), is unprecedented in the U.K. and will send shockwaves across corporate Britain” END

Make no mistake. There are considerable problems and adverse publicity facing BAE in the coming months. Public awareness of Corporate Governance issues has been raised over the last year or so with the high-profile financial scandals.

Background

Background briefing reveals how the story can be treated in quite different ways. The Guardian sees the annoucement as vindication of its campaign against what it sees as corporate corruption supported by the British Government. In contrast, The Mail sees evidence of an anti-Capitalist plot.

Last time BAE Systems was threatened by justice in 2006, it wriggled free with the aid of a personal minute from Tony Blair. His questionable claim was that throwing the book at these merchants of war would threaten lives on British streets. The pressure on the Serious Fraud Office to drop its probe into the firm’s Saudi dealings amounted to – in the words of the high court judge who reviewed the case – “a gun held to the director’s head”.

Fifty years ago Britain could still boast a magnificent and proud industrial base, but today we only have two truly world class manufacturing giants.

The first of these is the superlative pharmaceuticals conglomerate Glaxo and the second is the great defence contractor British Aerospace.

yesterday’s news that the Serious Fraud Office wants BAE to be prosecuted for corruption is not just a calamity for the company, its shareholders and the men and women who work for it.

It is also a national disaster, with devastating consequences for British domestic employment, overseas earnings, and our standing throughout the world. It is doubtful whether BAE could easily survive paying the £1billion fine that the SFO is reportedly demanding, nor the massive reputational damage that would result.

Of course, we would all have to stomach this national calamity if BAE really was corrupt and a disgrace to Britain. No one can condone corruption. But is BAE really corrupt? Or is it about to become the victim of a gross miscarriage of justice?

Oborne goes on to suggest that BAE Systems is operating globally where one culture’s incentives is another culture’s corruption.

BAE, Britain’s biggest manufacturer, would dearly like to make a limited admission of guilt, pay a fine and move on. It would love to settle the case by plea bargain and turn over a new leaf, to use the cliché.

That’s wholly rational, in that most of the senior executives of the company weren’t with the business in the period when, by its own admission, it wasn’t as scrupulous in its business practices as it would now like to be. But its directors have a legal duty not to hand over cash or damage the reputation of the company – through what would be seen as a confession of wrongdoing – unless they are advised by their own lawyers that the SFO has an overwhelming case.

A Case for Analysis

The case offers much for analysis. The Guardian and The Mail have been useful starting points as wirnesses for the prosecution and for the defense. Might it be possible to apply a little more creative thinking to provide advice for the future of BAE Systems, and implications for global organizations in general, and Governments, based on the case?